The Norwegian aquaculture analysis 2017

Transcription

1 The Norwegian aquaculture analysis 2017

2 Contents The Norwegian aquaculture analysis: an overview 4 The aquaculture industry at a glance 2016 and Introduction 7 Key findings 8 Licenses 11 Digitalization 12 Global perspective 13 Segment analysis 15 Technical solutions 16 Biotechnology 17 Production 21 Distribution 26 Processing 30 Activity going forward 33 Future outlook 34 Methodology 37 EY contacts 38 2 The Norwegian Aquaculture Analysis 2017

3 The Norwegian Aquaculture Analysis

4 The Norwegian aquaculture analysis: an overview The Norwegian aquaculture analysis: an overview We are pleased to present EY 2017 analysis of the Norwegian aquaculture industry. The analysis covers companies within the value chain from technical solutions to production and export of salmon and trout. EY, as a multidisciplinary provider of professional services to leading companies within the industry, possesses insights in each segment of the value chain with EY professionals located in numerous seafood clusters and marketplaces. When analyzing the developments in the aquaculture industry, global megatrends and the challenge of disruptive innovations are of great importance. Underlying forces of disruption are technology, globalization and demographics. Our research has global food, and salmon in particular, industries: Growing world population and need for nutritious food Health conscious consumers Increased focus on sustainable food production Increased urbanization This perspective puts the demand side of Norwegian aquaculture industry into a larger global framework with implications greater than creating local value. By responding quickly and proactively to these trends, new business opportunities and value creation will emerge throughout the whole value chain and not only within farming. The latter is currently experiencing volume constraints due to biological challenges, regulations and need for technology development. For salmon farming, which represents as little transfer value of know-how and technology applied to other species and agriculture sector is considerable. For the sake of completeness and due to the fact that the majority we have taken into account the positive developments in the industry and periodic reports during 2017, when we have made our assessments and analyses. The export value of sea farming has more than doubled since drivers were the favorable exchange rates due to a strengthened competitiveness for Norwegian goods and services abroad, and low domestic interest rates. 4 The Norwegian Aquaculture Analysis 2017

5 The Norwegian aquaculture analysis: an overview costs in the period, which has been mainly driven by the increasing focus is put on mitigating factors. The feed and sea farming segments retain their positions as the strongest contributors to value creation. Within these segments, the industry has managed to develop large industrialized business units. However, there are forces reducing the margins and the strategic strength of the traditional feed producers, calling for business repositioning and core product development. volatile development in the egg and spawn production as well as in production segment showed an upward trend, as opposed to smolt production that delivered stable margins on rising revenues as a result of larger smolt being sold. expect consolidations in this segment going forward. The technical solutions segment is still fragmented, but has, acquisitions, giving rise to companies of a more optimal size. Hence in the future, we expect to see accelerating innovation and product development. The focus on adaption of insights and technology from the sectors such as subsea, offshore and shipping will further stimulate applied solutions to the aquaculture industry and give rise to market opportunities in the aquaculture sub-segment other than salmon production. We are, therefore, still of the opinion that this segment is increasingly important to follow. Given the positive development of the salmon aquaculture industry in the recent years we have seen an increased interest for this entering the aquaculture value chain. Industry representatives recognize this positive attitude by the way of industry sentiment surveys. However, by nature, such measures are biased and tend to underestimate the efforts needed to manage challenges and realize opportunities in an industry exposed to biological risks, consumer disruption and strong competition from a range of products and substitutes. Reputational risk related to sustainable greatest market risk for the industry. enlightening. If you have any comments or questions with regard to the analyses, please don t hesitate to contact us to discuss the aspects of this exciting industry. Eirik Moe The Norwegian Aquaculture Analysis

6 The aquaculture industry at a glance 2016 and 2017 The aquaculture industry at a glance 2016 and % compared to that of preceding years, the potential for increased harvest was hampered by sea lice challenges. Total 1 19% mortality 2 Big data and artificial intelligence were introduced in the Norwegian aquaculture industry to successfully predict sea lice two weeks in advance. The and biological effects of proposed actions. 5 29% increase in total export value and all-time high margins Norwegian salmon farmers experienced high prices throughout trout). The high prices more than balanced increasing costs 1 Export value of salmon and trout in NOKb Atlantic salmon Large trout In October 2017, the Norwegian Government introduced a new initiative for predictable and sustainable growth in the aquaculture industry the traffic light system. shows an increase of that of The share of women in the Men Women The initiative dives the Norwegian coast line into 13 production areas, and labels them green, yellow or red, depending on year. Yellow areas are kept constant, while red areas are not systems) may still be offered growth. 3 6 The Norwegian Aquaculture Analysis 2017

7 Introduction Introduction Welcome to the second edition of EY s annual review of the Norwegian aquaculture industry. In this report, we focus on recent developments within the sector and analyze the possibilities that arise from digitalization and use of big data. The Norwegian aquaculture industry has witnessed a tremendous development through recent years, with a total revenue growth growing demand in existing markets and evolution of new markets. growth. Both the industry as a whole and the different segments of the value chain attract a lot of attention. With this report, EY sets out to performance of the aquaculture industry. In this edition, we focus on the key developments within the last arise as digitalization and use of big data become more and more widespread. With a database including more than 700 Norwegian companies, we can provide insights based on large amounts of data. Norwegian aquaculture industry. Aggregated revenues Revenue (NOKb) Revenues EBITDA margin 16% 14% 12% 1 8% 6% 4% 2% EBITDA margin Inclusion criteria of the following criteria are met: industry. Value chain segments Company size definition NOK1b Methodology and across the value chain, we have gathered information from have been made to present the data on a calendar-year basis. geographic regions and offer products and services in more than one segment of the value chain. However, in this analysis, each company is linked to only one geographic region, based on its main business address, and to only one segment of the value chain, based being over- or understated compared to the actual total. For larger industrial conglomerates with multiple subsidiaries, each entity is The methodology does not capture or eliminate intercompany transactions or revenues in holding companies registered abroad. industry. Thus, foreign units owned by Norwegian companies misrepresentative picture, particularly for the companies noted on part of their business outside Norway. The Norwegian Aquaculture Analysis

8 Increased revenues in 2016 segments and subsegments experienced revenue growth from is driven by a reorganization within the aquaculture industry. The trading segment, which in 2015 was an integrated part of the This revenue was in 2015 and previous years eliminated in the combined revenue for the aquaculture industry, as it was reported as part of the production company. demand and a 5% reduction in the Norwegian salmonids harvest We will take a closer look at the key drivers per segment on the next page and later in this report. Revenue and EBITDA% Revenue (NOKb) % 14% 12% 1 8% 6% 4% 2% EBITDA margin While the companies in the sea farming subsegment were the ones positive spillover effects on most of the companies operating within the Norwegian aquaculture industry. Revenues EBITDA bridge EBITDA margin EBITDA and EBITDA drivers In 2015, despite the aggregated revenue growth, the aquaculture industry experienced a slight margin reduction for the second year in a row. This margin reduction was mainly accredited to the sea farming subsegment and the increased cost level associated with sea lice and diseases. general cost level in the sea farming subsegment continued to outweighed the sustained increasing cost level, contributing to a The cost for the other segments in the aquaculture industry also observed in On the other hand, for most of the segments, the revenue growth was well above the cost increase, resulting increased from 11.1% to a record high 15.1%. Given the relatively large size of the production segment, it is no closely linked to the performance of this segment. In the production segment, there is a clear correlation between the development in EBITDA (NOKb) EBITDA 2014 Technical solutions Biotechnology Production Distribution Processing EBITDA 2015 Technical solutions Biotechnology Development EBITDA margin and salmon prices Salmon price (NOK) per kg (average)) Production Distribution Processing EBITDA % % 14% % % % 4% % Salmon price (NOK) per kg (average) EBITDA margin EBITDA margin 8 The Norwegian Aquaculture Analysis 2017

9 Segment distribution of the value chain, and as commented in the previous section, the production segment is generating the largest share of the closely linked to the change in the average salmon price from as The production segment was not the only segment having a Technical solutions segment The growth in the technical solutions segment can largely be attributed to the development in the sea farming subsegment. Biotechnology segment Production segment While the smolt production subsegment has generated relatively stable margins, egg and spawn production and sea farming margin growth. The same applies for the egg and spawn producers, to the sale of mature salmon grown on the egg producers own licenses, as opposed to egg and spawn. Distribution segment Whereas transportation at sea and slaughtering experienced stable the increased salmon prices to international consumer markets. on some of the trading companies. Processing segment The same trend observed for the trading subsegment is relevant for the processing subsegment. While the revenue is positively impacted by the increase in average salmon prices, the processing companies are not able to fully transfer the effect of increased salmon prices to the end customer. Segment distribution EBITDA, NOKb % 51% 79% 76% 71% 81% Technology solutions Biotechnology Production Processing Distribution Salmon price (NOK) per kg, average EBITDA margin per segment and subsegment Technical solutions 9% 8% % Biotechnology 8% 6% 5% 7% 11% Fish health 1 11% 12% Feed 5% 1 Production 12% 28% 27% 23% 36% Egg and spawn production 2 13% 27% 23% 21% 22% 21% 22% 11% 27% 37% Distribution 3% 3% 3% 3% 1% Trading 2% 2% 2% 1% % 1 11% Transportation on sea Processing 5% 3% 5% 5% 4% 2% 3% 1 11% 11% Salmon price per kg (annual average) The Norwegian Aquaculture Analysis

10 The development license system aims at facilitating evolution of technology for solving both environmental and territorial challenges in the aquaculture industry. 10 The Norwegian Aquaculture Analysis 2017

11 Licenses Licenses New regulations from 2017 following rules to regulate the new growth system, effective from October its capacity to an adjacent area. Thus, all entities could produce sea lice will be offered growth regardless of the status in their production area. The traffic light system and aquaculture locations Further, the coast is divided into 13 different areas each with a Source: Norwegian Directorate of Fisheries, 2017 Development licenses The development license system aims at facilitating development of technology for solving either environmental or territorial challenges in the aquaculture industry. The system is a temporary arrangement that offers licenses to certain projects based on innovation and resource requirements, and it requires sharing of developed technology in order to generate industry-wide improvements. In 2017, the following development licenses have been issued: The application deadline was 17 November There are still 75 applications not yet processed, implying we could expect more Source: Norwegian Directorate of Fisheries, 2017 Green licenses environmental and territorial challenges. There have been no changes in green licenses in Allocation of sea farming licenses, 2017 No. of licenses North Nordland Nord-Trøndelag Sør-Trøndelag Møre og Romsdal Sogn og Fjordane Hordaland Rogaland Other The Norwegian Aquaculture Analysis

12 Digitalization Digitalization We believe that the sector as a whole will change materially and grow in the coming years as a result of sustainable innovations and investments in digitalization. These changes will bring new revenue streams and opportunities for economies of scope and scale. The players succeeding at digital innovation will be in a strengthened position. Emerging opportunities New data-based business models and partnership models analysis and predictive models for growth, feed or pathogenic factors Optimized operations and traceability through digital supply chain and blockchain Reduced maintenance costs and operational risk through integrated operations, sensor- and camera-based monitoring, replacement parts Challenges to manage New competencies required across both individual organizations from analytics valuable asset Increased operational risk as technology reliance increases companies will be able to innovate to increase revenues, reduce costs, risks and environmental footprint. Drivers for digitalization Increased focus on environmentally friendly solutions Biological challenges pressuring margins Norwegian producers need to retain reputation for high quality Heavily regulated licenses limiting expansion of scope and scale for fish health 12 The Norwegian Aquaculture Analysis 2017

13 Global perspective Global perspective of high-protein, nutritious food Focus on climate change and a resourceful planet requires sustainable food production Health conscious consumers and growing health needs will drive demand for healthy food Increasing urbanization will raise household incomes, affecting the types and timing of food product demand World production of Atlantic salmon (rw 1,000) Production of atlantic salmon 3,000 2,500 2,000 1,500 1, Norway Chile UK Canada Faroes USA Ireland Australia Other Source: Pareto, Kontali e 2017e 2018e 2019e 2020e Norway the world s leading salmon supplier Norway contributes more than 5 of the global salmon production and, despite low volume growth forecasts, is expected to maintain this market leading position in the years to come. salmon is expected to grow its market share in key markets in the coming years. 1 The share of aquaculture in global fish production is estimated to increase 2 about 1.7% of the global seafood farming volume, all species included, which shows that salmon farming is still a small industry in the global perspective. 3 Further export opportunities Norwegian technical suppliers to the aquaculture industry have, in our view, an untapped potential to further leverage their competency, experiences, products and services to markets outside Norway. With inspiration from the international journey of the Norwegian oil service segment and improved financial strength from new owners and investors, the technical supplier segment should aim to increase its global footprint in the years to come. Global footprint of Norwegian sea farming companies This analysis only includes Norwegian registered companies; however, the reach of the Norwegian aquaculture industry goes far beyond that. business through foreign entities too. The revenue and results of these entities are reported in the consolidated group accounts of the Norwegian parent companies, but excluded from this analysis. farming groups, almost a third of the reported volume was produced abroad. In other words, Norwegian companies are the key drivers behind In our view, the global footprint of Norwegian sea farming companies could, to a larger extent, serve as a gateway for more technical and other aqua-related suppliers into international markets. Food and Agriculture Organization of the United Nations The Norwegian Aquaculture Analysis

14 Global perspective Norwegian companies have an untapped potential to supply products and services in the global market. 14 The Norwegian Aquaculture Analysis 2017

15 Segment analysis Segment analysis Technical solutions Biotechnology The value chain When discussing the aquaculture industry, we primarily talk about the end product salmon and trout but there are many other stages and actors in the industry. The aquaculture value chain of goods and services. For analytical purposes, the value chain and the value creation can be presented in different ways. The Atlantic salmon life or production cycle months In particular, there are three groups of suppliers, namely technical solutions suppliers, biotechnology suppliers and distributors, which can be challenging to present in a common value chain. These three can also be perceived to work in tandem or as parallel activities. It is apparent that technical solutions suppliers are needed at can be misleading. Biotechnology suppliers, who deliver a wide range of products challenge. The common denominator for these products are the biological or pharmaceutical raw materials. The biotechnology manufacturers supply both egg and spawn producers, smolt producers and sea farmers. needed for both transporting smolt from freshwater to cages in sea farmers and provide it to the end consumers, either slaughtered or processed. The primary value creating activity in the industry is production. seawater temperature months Salmon Farming Industry Handbook 2016 technical solutions, biotechnology and distribution together with production and processing in one single value chain. This is to make the analysis easier to follow and interpret. The Norwegian Aquaculture Analysis

16 Segment analysis Technical solutions Technical solutions Biotechnology About the segment The technical solutions segment includes companies with approximately 5 or more of its business linked to the aquaculture industry, but which are not directly linked to any of the other segments. Hence, there is a large variety of products and services provided by the companies in this segment. The largest companies within this segment are producers of aquaculture industry, e.g., barges, wellboats, feeding systems, cages, mooring systems, sea lice treatments and software. Segment highlights segment with record high revenue and margin levels. Revenue growth, biological challenges and a general increase in production cost. growth have given the salmon producers incentives to invest in to invest in new technologies and software to bring down the cost, for instance, by improving the feed conversion ratio or monitoring the biomass to bring down mortality rates. growth in the technical solutions segment, where several companies have developed new and alternative solutions for battling sea lice, for example. analysis, the technical solutions segment is fragmented and still has continued throughout We anticipate continued growth in the number of mergers and acquisitions due to high interest Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Segment composition (2016) Number of companies 22% 78% Revenue Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b 74% 26% 25% 2 15% 1 5% 16 The Norwegian Aquaculture Analysis 2017

17 Segment analysis Biotechnology Revenues continue to grow with increased salmon prices and focus on fish health Technical solutions Biotechnology About the segment The biotechnology segment includes companies offering services and products related to feeding, medicines, vaccines and cleaner the salmon). We have divided the segment into two subsegments: 1. Fish health 2. Feed Key financials 30,0 25,0 Revenue (NOKb) 20,0 15,0 10,0 5,0 3 25% 2 15% 1 5% Segment highlights prices, by contributing to both nutritious feed and prevention aquaculture industry, and the cost of feed is the most prevalent be prohibited to do experiments on living species without having data modulated salmon to be used to discover effects of different vaccines. health subsegment, the rest to the feed subsegment. While the large feed-producing companies are operating at high volumes and low margins, some of the small companies, typically margins. of , Revenues EBITDA margin ROCE Segment composition (2016) Number of companies Revenue 3% 19% 22% 43% 38% 75% Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b The Norwegian Aquaculture Analysis

18 Segment analysis Biotechnology (contd) Revenues continue to grow with increased salmon prices and focus on fish health Fish health Feed Fish health development of the industry. the freshwater stage. There are, however, still major battles to Norwegian salmon farming, but there are risks of other illnesses lead to other infections such as bacterial, fungi and suboptimal salt balance. The sea lice challenge in the sea farming phase and the development of drug resistance calls for new innovative solutions. The Norwegian Government has addressed this need through the introduction of research and development licenses. These licenses have built-in incentives for different solutions managing sea lice and disease challenges. consequences and preventing spread of the disease. It has reduce risk of spread. concept ifarm was found to be within the scope of the Norwegian primarily a result of higher gross margins stable EBIT and continued growth in capital employed. Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Segment composition (2016) Number of companies 15% 19% 85% 81% Revenue Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b while at the same time harvested volumes rocketed. Increased growth leads to expected continued worldwide growth in the subsegment. There are still several diseases with no available vaccines. 4 35% 3 25% 2 15% 1 5% 18 The Norwegian Aquaculture Analysis 2017

19 Segment analysis Fish health Feed Feed 1 salmonids, and is, as such, a key focus area in the industry. raw materials. The shortage of marine resources has led to the exploration of new ingredients, both marine and nonmarine. 2 to insect-derived proteins in mid It is an ongoing process to implement corresponding regulations in Norway. We already developing insect-derived feed ingredients. research shows that even the effects of pancreas disease might 3 consists of a few large producers controlling the majority of subsegment. imply that margin effects of increased salmon prices are absorbed in this part of the value chain, to a moderate extent. It can be attributed to the bargaining power, increased biological insight and knowledge of the largely consolidated subsegment. This is, mainly, driven by an increased focus on the effect feed feed producers have utilized their potential in gross margin, and represents an incentive for exploration of new cost-effective sustainable ingredients. volatile as capital employed is fairly small compared to EBIT. Top five companies (2016 revenues) Key financials Revenue (NOKb) 30,0 25,0 20,0 15,0 10,0 5,0 0, Revenues EBITDA margin ROCE Segment composition (2016) Number of companies 19% 38% 43% Revenue sustainable feed resources, the feed manufacturing industry absorbs margin effects of increased salmon prices. The industry must continue to develop new sources of ingredients to be able to deliver healthy feed at low costs as volumes are expected to increase. 1% 87% 12% Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b 3 25% 2 15% 1 5% Salmon Farming Industry Handbook 2017 BIOMAR website November BIOMAR website November The Norwegian Aquaculture Analysis

20 Segment analysis dependent on high quality both in broodstock, eggs and handling and vaccination of fry during the freshwater stage. 20 The Norwegian Aquaculture Analysis 2017

21 Production Record price levels drive all-time high profits, while operational concerns curb enthusiasm Segment analysis Technical solutions Biotechnology Production About the segment grave starting with breeding and fertilization of eggs, through the to harvest size. 1. Egg and spawn production While each subsegment contains specialized stand-alone companies, there is also a large degree of crossover ownership between the subsegments as well as into other segments mentioned in this report. broodstock or eggs and in the handling and vaccination of fry during the freshwater stage, as such, we see many sea farming entities and high quality. Segment highlights rates for exports. subsegment is the main contributor to the segment s overall years, previous periods fell short compared to the all-time high and increasing demand for various supporting services have made the sector a major contributor to value and job creation along the Norwegian coast. concern with the sector s increasing challenges related to sea lice and other environmental issues. These challenges have plateaued the growth in production volumes for the past few term. Key fiancials Segment composition (2016) * Revenue (NOKb) % 4 35% 3 25% 2 15% 1 5% Number of companies Revenue 6% 6% 3 64% 61% 33% Revenues EBITDA margin ROCE Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b * Note that many legal entities counted as single companies in this report are, in reality, part of the same group. The Norwegian Aquaculture Analysis

22 Segment analysis Production (contd) Record price levels drive all-time high profits, while operational concerns curb enthusiasm Egg and spawn production Egg and spawn production The companies in this subsegment are specialized in spawning and egg production, but many also cross over into smolt production in the subsegment operate on a stand-alone basis as specialists, while others are owned fully or partially by sea farmers or other most important aspects of the aquaculture sector. and increasing production challenges related to sea lice and diseases, major investments have been made in the subsegment in recent years. development in the aquaculture sector, utilizing, among others, genetic technology to enhance resistance to diseases and sea lice, appearance, growth rate and other key attributes. the last 10 years and the slight stagnation in 2015 was more than increase in revenue from the sale of mature salmon grown on the egg producers own licenses, as opposed to egg and spawn. relatively high over the last 10 years. In 2015, the margin fell as a result of major investments and upscaling of production, while Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE 35% 3 25% 2 15% 1 5% 22 The Norwegian Aquaculture Analysis 2017

23 Segment analysis Egg and spawn production Smolt production Smolt production and the sea farmers from when the eggs are fertilized to when mature smolt is ready to be put to sea. This process, which in the in specialized smolt facilities. In recent years, production of larger up to 1kg have become more typical in order to shorten the time in sea due to the risk of sea lice and other illnesses. Top five companies (2016 revenues) Key financials or partially owned by sea farming companies, and deliver primarily within their own group. In addition to this, smolt is also produced by companies considered in this report as sea farmers. This relates to vertically integrated companies, that aim to produce their own high degree of cross-ownership and intergroup trade, along with other long-term business relations, contributed to the stable possible expansions both to open sea or land-based facilities, new possibilities arise in smolt production. However, with the opportunity of capturing a larger share of the value creation in the sector comes large investment costs and high risk. Revenue (NOKb) % 2 15% 1 5% Revenues EBITDA margin ROCE The Norwegian Aquaculture Analysis

24 Segment analysis Production (contd) Record price levels drive all-time high profits, while operational concerns curb enthusiasm Egg and spawn production Sea farming Sea farming farming is the largest contributor to the record high revenue and previous nine years average, the subsegment is experiencing in Norwegian salmonids harvest volumes, the annual average weakening of NOK vs. EUR. challenges, it is often hard to determine which is the most was the primary driver for the increase in cost and reduction in production volume, with key issues mentioned below: through increased use of lice treatments, specialized feed, cost related to starvation, delayed growth and forced early harvest, curtailing production plans and harvest volumes. Together with an increase in feed prices, the challenges related to sea lice have been the main cause for the increase in cost per kg over the last few years. The total cost per kg The cost per kg for all main components have increased in emphasis has been put on lice mitigation activities, we see a share of total cost. are unfavorable developments in the long term. increased demand seen over the last few years. Unusually high prices spike investment both in alternative sea farming solutions and new geographic regions, possibly increasing the in 2017, the sector has experienced continued high prices and year. Top five companies (2016 revenues) Key financials Revenue (NOKb) 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0, Revenues EBITDA margin ROCE Volume of fish, average value and EBIT per kg WFE * Thousand tonnes sold fish (WFE) Volume Revenue per kg EBIT per kg *Source: Directorate of Fisheries ( Volume equals sale of slaughtered fish, weight in metric ton round weight (WFE). NOK/kg calculated as value of slaughtered fish/volume WFE. Cost components per kg fish sold (WFE) NOK per kg WFE ,92 2,77 2,09 15,21 1,12 3,62 2,55 17,44 1,20 4,10 2,69 18,74 1,36 4,59 2,90 21, ,72 5,40 3,43 23, COGS Personnel Opex Dep & Amo, Writedowns 1 NOK/kg (WFE) 24 The Norwegian Aquaculture Analysis 2017

25 Between diseases, extreme weather and other operational challenges, it is often hard to determine which is the most significant factor for the development in cost and production changes. Segment analysis The Norwegian Aquaculture Analysis

26 Segment analysis Distribution Technical solutions Biotechnology Distribution About the segment The distribution segment includes companies offering services related to trading, slaughtering and transportation on sea. We have divided the segment into three subsegments: 1. Trading 3. Transportation on sea Segment highlights business was integrated with the production business and, the combined segment revenues increased by 21.2%, still a increased revenues are hardly surprising. to push through the increased salmon prices to international consumer markets explain why the revenues did not increase even more. in overall segment. but up for slaughtering companies. Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Segment composition (2016) Number of companies 27% 7% 66% 77% Revenue 4% 19% Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b 3 25% 2 15% 1 5% 26 The Norwegian Aquaculture Analysis 2017

27 Segment analysis Trading Transportation on sea Trading companies Norwegian-registered trading companies for farmed salmon and trout include both independent trading companies and trading companies owned by salmon producers that have organized this trading as an integrated part of their production companies; however, these are not included in this analysis. years has been integrated and reported as part of the production margin, whereas increased personnel expenses also contributed. also created a very challenging sales and market situation for the the trading companies to a certain extent suffer under long- acceptance for higher prices in the end markets, putting a strain on the gross margin. export markets for Norwegian salmon measured in value. The export value of salmon increased for all markets shown in the changes. In terms of volume, the exported volume decreased the Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Sold volumes of slaughtered fish (round weight) Tonnes, round weight 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Source: Directorate of Fisheries 3 25% 2 15% Export markets for salmon (2016 values) 5% 2% 6% 7% 5% 6% 6% 4% 12% 2 13% 14% Other EU Other countries Poland France Great Britain Denmark Spain USA Sweden Germany Japan Russia 5% -5% Source: Directorate of Fisheries The Norwegian Aquaculture Analysis

28 Segment analysis Distribution (contd) Trading Slaughtering Transportation on sea Slaughtering suppliers and salmon producers as an integrated part of their value chain. This analysis includes only slaughtering businesses that are organized in separate legal entities, and it will, therefore, underestimate the total size of the subsegment. both that the segment has been able to increase prices, or that slaughter volumes have increased for separate slaughtering entities, on the expense of slaughtering plants in integrated salmon producers. will impact both volumes and timing of the supplies, which may be very cyclical. slaughtered per slaughtering plant. expenses was stable, other operating expenses fell somewhat margin was, however, a higher gross margin, indicating higher prices. onboard and transported on sea directly to production sites closer ordered a slaughtering vessel that will collect the salmon at site, vessel will have a capacity to slaughter 7,000 tons of salmon trucks over longer distances. Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Development in slaughtered volume and number of plants Tonnes 25,000 20,000 15,000 10,000 5, Tonnes slaughtered per slaughtering plant No. of approved slaugthering plants for salmonids Source: The Norwegian Food Safety Authority % 14% 12% 1 0 8% 6% 4% 2% No. of plants 28 The Norwegian Aquaculture Analysis 2017

29 Segment analysis Trading Transportation on sea Transportation on sea The subsegment consists of wellboat companies that transport smolt to sea farms and live salmon and trout from farming cages of NOK1b. and utilization levels. The industry keeps being dominated by 77.7%. and other operating expenses relative to revenue. Higher activity has increased the reported number of employees the last year. 22.1% increase in capital employed as the companies continued their investments in larger and more technologically advanced increase. The net impact on supply will depend on the number of scrapings and vessels on international contracts. companies owned in full or part by salmon producers. Through and later. This trend will undoubtedly increase margin pressure in the industry going forward. one processing vessel in the Norwegian market for the past 10 years; however, several more are now planned for and advocates for this trend pinpoint advantages such as lower investments and contamination risk of sea lice and diseases. Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Number of wellboats * Number of well boats Key drivers that we expect will impact the wellboat industry going forward include the entrance of salmon producers as investors and owners of wellboats, the effects of new industry regulations concerning water quality and potentially freshwater treatments and the experience with processing vessels as a potential substitute for wellboats. Finally, continued high revenues and margins will depend on the lack of immediate 5 45% 4 35% 3 25% 2 15% 1 5% * Based on the number of members in Fraktefartøyenes Rederiforening. The Norwegian Aquaculture Analysis

30 Segment analysis Processing by other parts of the value chain Technical solutions Biotechnology Processing About the segment The processing segment includes companies offering services primarily related to secondary processing and companies producing different types of packaging. Key financials Segment composition (2016) Revenue (NOKb) % 12% 1 8% 6% 4% 2% Company size 21% 2% 77% 28% Revenue 55% 17% Revenues EBITDA margin ROCE Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b 30 The Norwegian Aquaculture Analysis 2017

31 Segment analysis Processing Processing We distinguish between primary and secondary processing. processing leads to products normally referred to as value-added processing is offered by both individual entities and salmon producers as a part of their value chain. The analysis will, therefore, underestimate the total size of the subsegment. earlier, this now seems to be an increasing trend. This gives rise to in terms of costs and environmental footprint as transportation routes could change and shorten. the processing subsegment has not fully transferred the effect of increased salmon prices to the end customer. Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Segment composition (2016) 19% Company size 2% 3 Revenue 17% 12% 1 8% 6% 4% 2% 79% 53% Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b The Norwegian Aquaculture Analysis

32 Segment analysis Processing (contd) by other parts of the value chain Packaging Packaging The packaging subsegment consists of small- to medium-sized companies producing and providing all sorts of packaging and for the aquaculture industry, a vast share delivers products to other industries as well. Thus, the subsegment is partly overstated in absolute terms. NOK151.2m. by increases in shipped volumes rather than increases in salmon Top five companies (2016 revenues) Key financials Revenue (NOKb) Revenues EBITDA margin ROCE Segment composition (2016) 5 Company size 5 82% Revenue 18% 5 45% 4 35% 3 25% 2 15% 1 5% Small: <NOK100m Medium: NOK100m NOK1,000m Large: >NOK1b 32 The Norwegian Aquaculture Analysis 2017

33 Activity going forward Activity going forward Methodology incorporated into the model, varying among the different salmon price and volume) and revenue Introduction The Norwegian aquaculture industry has experienced tremendous growth for several years, and we expect this to continue. In the Norwegian aquaculture analysis, two segments make up the majority of revenue: sea farming and trading. Both are directly forecast. We note that despite a volume decrease from 2015 to Going into the last quarter of 2017, salmon prices have dropped and October 2017 may seem like a formidable drop; however, salmon 2011, a change of 35%. There is currency exposure in both revenue and cost for the farming costs are in other currencies than NOK. In theory, the forecasted NOK price of salmon should, take currency effects into account. raw materials originate from a broad range of currencies, and are Norwegian aquaculture forecast NOKb Going forward the second half are not expected to drive the average annual price even though demand may have increased, we see that the sudden to a sharp decline in price. Overall, production volume in 2017 is expected to be a couple of percentage points higher than that of stipulated a 1% 3% volume increase in that such volume increase will be seen throughout the segment, especially with the continued biological challenges and high mortality rates. However, we do believe there will be higher volume seems to be the consensus among analysts and forward contracts The effects of increased volume production and decreasing prices are show in the chart Norwegian aquaculture forecast yields a positive contribution to margins. On the other hand, we expect biological challenges to be a continued threat to margins and expect that the industry will need to continue their investments will be greater than the positive volume effect resulting in a 2017 increased the price for the end consumers through This may have a negative impact on demand going forward. On are both in early stages of recovery and is expected to increase. 2 15% 1 5% EBITDA margin E 2018E Revenue EBITDA margin The Norwegian Aquaculture Analysis

34 Activity going forward Future outlook Growth through sustainable innovation the technogreen revolution The aquaculture industry is aiming to become the most valuable export industry in Norway. farming. In that respect, the ongoing research and development license program may provide the industry with robust and sustainable solutions. The government is, however, facing challenges in managing the awarding of green licenses and in the selection of players who will be the most positive contributers in the sustainable farming race. Research and innovation is closely linked risk, and failure is inevitable for some of the ideas presented. amounts of risk capital into new innovative closed offshore farming installations, onshore facilities and biotechnical treating and preventive measures. We may expect the outcome of these innovative investments to and capacity. However, we do not expect to see major scalable period. In the meantime, demand trends are rising and supply estimates are challenged. Hence a major issue for the industry will revolve around the sustainable international market price equilibrium. We already see that the processing and distribution segments face challenges because of the current price level benchmarked toward substitute product. The market entry of new consumers in emerging economies and urban growth areas do, however, balance the reduced volumes in mature, price-sensitive mass markets. For the value chain as a whole, the biological challenges, combined with all-time high margins as a result of the high salmon price, have represented a sound platform for developing forefront solutions within software, hardware, biotechnical, processing and logistical products and services. Including the potential of these players and their potential to deliver to farmers of other species of aqua and agriculture, the target of becoming the most valuable export industry in Norway, seems more attainable. 34 The Norwegian Aquaculture Analysis 2017

35 Activity going forward Megatrends will change the industry 1 will continue to have powerful effects on the global aquaculture and seafood industry. Digital and behavioral revolution The digital revolution and deployment of behavioral technology solutions, can become powerful tools. For example by customizing nudges in smart phones and smart watches, helping people to a healthy diet. However, introducing big-data processing and digital tools may solve issues related to traceability from raw material breakthrough in analyzing predictive models for growth, feed or pathogenic dependencies. Resourceful planet and sustainable food production The world population is growing, which will have a direct impact on the need for protein-rich, nutritious food. in 2050, which will challenge the natural resource constraints. The question is whether innovation can make the planet resource-rich instead of resource-scarce. In the aquaculture industry, this implicates sustainable solutions producers of meat and poultry, together with other marine-based protein sources. Feed is an important factor in providing nutritious and healthy products. Other challenges will be how to handle spill water, antibiotics and a growing demand for sustainable see a gradual shift from wellboats to combined well-, slaughter required from a cost optimization perspective. households where both spouses work, leading to higher household incomes and less available time for preparing meals. This will have a large implication on the market growth in regards to feeding a growing population, customizing products to segments and delivering products at the right time. Conscious consumers and health reimagined The behavioral revolution has already impacted the demand behavior and habits, such as poor diets, lack of exercise and excessive consumption. Health care spending is on an unsustainable trajectory, thanks Omega 3-based) are important. By responding quickly and proactively, new business opportunities and value creation will emerge. If the companies in the Norwegian aquaculture industry manage to stay on top of these trends, they will reap the rewards of a new global reality. Increased urbanization rates of urbanization, the world will be two-thirds urban and one- 1 The Norwegian Aquaculture Analysis

36 Activity going forward 36 The Norwegian Aquaculture Analysis 2017

37 Methodology Methodology Data collection geographic location. The number of companies included in the analysis will vary somewhat depending on the availability of In order to analyze economic activity by geographic location and have been analyzed through their constituent individual companies and not as a consolidated group. Intercompany transactions In addition, the revenues of subsidiaries owned by a Norwegian reports were not available by the time this report was prepared. For Inclusion criteria of the following criteria are met: sector. Value chain segments Each company in the aquaculture portfolio has been reviewed individually and an assessment has been made with regard to the company s position in the value chain. The value chain has the following categories: Company size definition NOK1b Location illustrate where the value creation takes place along the coast from north to south in Norway: counties) Calculations EBIT = Earnings before interest and tax duties payable) Each of these categories are further broken down into subsegments to capture the huge diversity within the industry. segment in which they generate the majority of their revenues. The Norwegian Aquaculture Analysis

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39 EY contacts The Norwegian Aquaculture Analysis

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